Repo rate cut takes sensex to new record, cheaper loans likely

The Reserve Bank of India (RBI) again surprised the nation by holding an unscheduled monetary policy review on Wednesday and reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points (bps) from 7.75% to 7.5% with immediate effect. As a result, the reverse repo rate under the LAF stands adjusted to 6.5%, and the marginal standing facility (MSF) rate and the bank rate at 8.5% with immediate effect.

The cut in the policy rate by RBI will help in lowering interest rates and make home, auto and corporate loans cheaper. Country's largest lender State Bank of India welcomed the second surprise rate cut and promised to take an "appropriate call" on its lending rates. "We welcome the repo rate cut by RBI... Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances," SBI chairperson Arundhati Bhattacharya said in a statement.

Meanwhile, key indices jumped in early trade after the monetary policy review with the S&P BSE sensex crossing the 30,000 level for the first time in its history. Nifty moved past psychological 9,000 level. The index gained 431.01 points at the day's high of 30,024.74 in early trade, a record high. By noon the sensex settle around 29,890. This was the first time that the bank has announced a monetary policy action ahead of markets opening.

On the policy front the RBI said that the guidance on policy action given in the fifth-bi-monthly monetary policy statement of December 2014 is largely unchanged. Further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon outturn and developments in the international environment, RBI said.

This unscheduled review (second in last few months) was prompted by two factors: first, while the next bi-monthly policy statement will be issued on April 7, 2015, the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance. Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate, RBI said.

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